Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays.
When people share their retirement plans with me, they often assume that they’ll be able to reduce their spending once they retire. At first glance, this seems reasonable.
After all (they tell themselves) they won’t have to support the kids anymore and the house will be paid for. And the media encourages people to think this way too. They make the argument that once folks retire, they usually spend 80% of what they spend while they are working.
This kind of thinking is wrong and dangerous… Unless you are very mindful and really understand how much money you will need to retire.
My experience tells me that retired people can easily spend as much (or more) than they do when they were working.
Why is that?
For starters, people spend money when they have free time. If you think about it, I’m sure you’ll agree that you spend more money during the weekends than during the week. Why? Because you have the time to do it.
When you’re retired, every day is a Saturday. You can go to movies, have lunch, buy clothes, bowl. Whatever you want. For many, the alternative to spending is sitting at home doing nothing. That’s why they go out and spend.
Their are a few more reasons to explain why we often spend more money during retirement than when we were working.
First, if you got lassoed into paying for your childrens’ expensive college education, you might have refinanced your home. So even though your plan was to pay off your mortgage by the time you retired, the actual situation might be very different. That means you’ll be paying that mortgage for much longer than you had originally anticipated.
Also, times are tough right now. You might be supporting your adult children now. There is a lot of that going around these days.
Finally, there is always inflation. When you are retired, you might spend a disproportionate amount on items that inflate faster than average. Think about what inflation will do to your retirement.
Medical care is one example of this. Another is travel and entertainment. What I’m saying is that the overall inflation number isn’t all that important. What matters to you is the price increases for those things you’ll spend money on once you retire.
So how do you combat this issue before it becomes a huge problem?
1. Track your spending
Tracking your spending and having a budget is more important once you retire than before you retire. I say this because once you retire you can’t just go out and earn more money. In most cases, your income will be fixed and the only thing you’ll have any control over will be your spending. Track your spending and make sure you make adjustments sooner rather than later if problems start coming up.
2. Be a pessimist
When it comes to retirement planning, you should definitely be a pessimist. Plan for the worst and hope for the best. This way, you won’t be eating Purina Cat Chow and looking for a second job when you’re 87 years old. Don’t assume you’ll spend less once you retire. Build your financial plan on current spending and add in inflation.
3. Get Busy
Ever wonder why some smart retirees are busier after they retire than when they worked? It’s because they are smart. They know that they have to fill up their day with activities they enjoy or make money doing (or preferably both). They realize that if they don’t, they’ll have nothing but time on their hands. And they’ll use that time to spend money.
Volunteering is actually very profitable for retirees if for no other reason than it keeps them out of the shopping mall. Start thinking about getting involved in groups you care about now… Before you retire. This way, when you do ring the bell, you’ll have a welcoming support group and fun activities you can enjoy from day one.
4. Make new friends and get rid of some of your old ones
This might be a hard pill to swallow, but you really have to think about who you’re going to spend time with. If you’re on a on a middle-income budget but have friends who are used to going first class, that’s going to be a problem. It will be difficult for you to disengage and you’ll find yourself spending more money than you really want to spend. Start looking at your friends and their spending patterns now. Spend more time with people who have patterns similar to those you can afford.
If you’re in the home stretch for retirement, have you considered these issues? Do you think you’re going to spend less once you stop working? Why?